The Philippine Q3 2025 “4.0% GDP Shock” That Wasn’t

 

There is enormous inertia — a tyranny of the status quo — in private and especially governmental arrangements. Only a crisis — actual or perceived — produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable—Milton Friedman  

In this issue

The Philippine Q3 2025 “4.0% GDP Shock” That Wasn’t

I. Q3 GDP Shock: A Collapse Few Saw Coming; The Loose Cauldron of Policy Support

II. Why Then the Surprise?

III. The Echo Chamber: Forecasting as Optimism Theater

IV. Statistics ≠ Economics: The Public’s Misguided Faith

V. Ground Truth: SEVN as a Proxy — Retail Reality vs. GDP Fiction

VI. The Consumer Slump is Structural, Not Episodic; Hunger as a Better Predictor; CPI Is Not the Whole Story

VII. So What Happened to Q3 GDP?

VIII. Household Per Capita: The Downtrend

IX. The Real Q3 2025 GDP Story: Consumer Slowdown

X. Government Spending Didn’t Collapse — It Held Up Amid Scandal; Public Construction Implosion

XI. External Sector: Trump Tariffs’ Exports Front-Loaded, Imports Slowing

XII. Corruption Is the Symptom; Policy Induced Malinvestment Is the Disease

XIII. Increasing Influence of Public Spending in the Economy

XIV. Crowding Out, Malinvestment, and the Debt Time Bomb

XV. Statistical Mirage: Base Effects and the GDP Deflator

XVI. Testing Support: Fragility in the Data, Institutional Silence

XVII. Overstating GDP via Understating the CPI

XVIII. Real Estate as a Case Study: GDP vs. Corporate Reality

XIX. Calamities and GDP: Human Tragedy vs. Statistical Resilience

XX. Calamities as a Convenient Political Explanation and Bastiat’s Broken Window Fallacy

XXI. Expanding Marcos-nomics: State of Calamity as Fiscal Stimulus

XXII. More Easing? The Rate-Cut Expectations Game

XXIII. A Fiscal Shock in the Making, Black Swan Dynamics

XXIV. Conclusion: Crisis as the Only Reform 

The Philippine Q3 2025 “4.0% GDP Shock” That Wasn’t 

Behind the typhoon-and-scandal headlines lies the real story: a shocked consensus, overstated aggregates, expanded stimulus, and a political economy running on malinvestment.

I. Q3 GDP Shock: A Collapse Few Saw Coming; The Loose Cauldron of Policy Support 

The Philippine government announced that Q3 GDP growth slumped to a mere 4%, the slowest pace since the pandemic recession. This came as a ‘shock’ to mainstream forecasters, who had projected a modest deceleration—not a plunge. 

Statistics must never be viewed in isolation. This GDP print must be seen in context. Q3 unfolded amid a deepening BSP easing cycle—six rate cuts (with a seventh in October or Q4), two RRR reductions, and a doubling of deposit insurance coverage. 

This stimulus-driven environment was reinforced by all-time-high bank lending, particularly in consumer credit, even as employment—though slightly weaker—remained near full employment levels. 

In short, Q3 growth occurred under the most accommodative financial and fiscal conditions in years—a cauldron of policy backstops. 

II. Why Then the Surprise? 

Forecasting errors were not only widespread—they were flagrant. 

Reuters called the result “shocking,” citing a corruption scandal linked to infrastructure projects that hammered both consumer and investor confidence. The report noted that growth came in “well below the 5.2% forecast in a Reuters poll and significantly weaker than the 5.5% expansion in the previous quarter.” 

BusinessWorld’s survey of 18 economists yielded a median forecast of 5.3%.

Philstar’s poll of six economists projected 5.45%, barely below Q2’s 5.5%. 

A 50-bps drop was labeled a ‘slowdown’? Really? 

That’s not analysis—it’s narrative management. 

Why such a brazen forecasting error? 

III. The Echo Chamber: Forecasting as Optimism Theater 

The DBM chief claimed that Q4 growth would “normalize,” insisting that the 5.5–6.5% full-year target “remains attainable.” 

Implicit in that projection was a soft but stable Q3—a forecast that proved disastrously optimistic. 

This consensus blindness mirrors past failures: the Q1 2020 COVID shock and the 2022 inflation spike. 

This isn’t ideological—it’s institutional. Forecasts aren’t tools for analysis; they are marketing vehicles for official optimism. Economic statistics are not used to diagnose, but to promote and reassure. 

Hence the futility of “pin-the-tail-on-the-donkey” forecasting: a guessing game played on deeply flawed metrics. 

IV. Statistics ≠ Economics: The Public’s Misguided Faith 

Statistics is NOT economics. 

Despite repeated misses, the public continues to cling to mainstream forecasts. They fail to see the incentive mismatch—institutions seek fees, commissions, and access, while individuals seek returns. 

Agency problems, asymmetric information, and lack of skin in the game define this relationship—core realities that mainstream commentary refuses to admit. 

V. Ground Truth: SEVN as a Proxy — Retail Reality vs. GDP Fiction

Figure 1 

Take Philippine Seven Corp. [PSE: SEVN]. In Q3: 

• Revenue rose just 3.8% YoY, its weakest since Q1 2021.
• Same-store sales contracted 3.9%, the worst since the pandemic.
• Store count rose 8.6%, yet total sales fell—signaling demand erosion. 

This downtrend, persisting since 2022, mirrors the slowdown in real retail and household consumption GDP, which posted 5.1% and 4.09% in Q3, respectively. (Figure 1, topmost and middle windows) 

Yet the gap between SEVN’s data and official GDP implies potential overestimation in national accounts. 

If major retail chains show a sustained slowdown or outright contraction, then headline consumption growth of 4–5% either overstates economic reality—or implies that GDP should be even weaker than reported. 

These trend declines offer a structural lens into the economy’s underlying deterioration. 

VI. The Consumer Slump is Structural, Not Episodic; Hunger as a Better Predictor; CPI Is Not the Whole Story

The consumer slowdown did not emerge from the corruption scandal or recent natural calamities (earthquakes and typhoons)—it preceded both. The underlying weakness has long been visible to anyone looking beyond the official narrative. 

While economists missed the turn, sentiment data didn’t. 

The SWS hunger survey—a proxy for household stress—proved a far better leading indicator. Its late-September spike revealed deepening hardship among lower- and middle-income Filipinos—mirroring the Q3 GDP plunge. (Figure 1, lowest graph) 

Like SEVN’s revenue and the deceleration in consumption and retail GDP, hunger is not an anomaly—it’s a trend. One that has persisted since the pandemic and now appears to be accelerating.

Figure 2

With CPI steady at 1.4% for two consecutive quarters—assuming the number’s accuracy—the malaise clearly extends beyond price pressures. 

The hunger dilemma reflects deeper economic deterioration: slowing jobs, stagnant wages, weak investments, falling earnings, declining productivity, and eroding savings. (Figure 2, topmost image) 

This is the institutional blind spot—prioritizing political and commercial relationships over truth. 

VII. So What Happened to Q3 GDP? 

Aside from back-to-back typhoons, officials attributed the unexpected slowdown to concerns over the integrity of public spending and further erosion of investor sentiment. 

And it was not just investors. According to Philstar, the DEPDEV (Department of Economy, Planning, and Development) chief said consumer confidence has also been hit by the flood control probes, with many households postponing planned purchases. 

But unless there has been a call for nationwide civil disobedience (à la Gandhi or Etienne de La Boétie), why should people’s daily consumption habits suddenly be affected by politics? 

The reality is more complex. Universal commercial banks’ household loan portfolios surged 23.5% in Q3 2025—marking the 13th consecutive quarter of 20%+ growth. If households weren’t spending, what were they doing with interest-bearing loans? Investing? Speculating? Or simply refinancing old debt? (Figure 2, middle chart) 

VIII. Household Per Capita: The Downtrend 

Meanwhile, real household per capita consumption grew just 3.2%, its lowest since the BSP-sponsored recovery in Q2 2021. This wasn’t an anomaly—it reflected a downtrend in household spending growth since Q1 2022. (Figure 2, lowest visual) 

In short, the corruption scandal was not the root cause but an aggravating circumstance layered atop an existing structural slowdown. 

IX. The Real Q3 2025 GDP Story: Consumer Slowdown

Let us look at the real Q3 2025 expenditure trend, and how it compares with recent periods. 

Q3 2025 (4% GDP):

• Household spending: +4.1%
• Government spending: +5.8%
• Construction spending: –0.5%
• Gross capital formation: –2.8%
•  Exports: +7%
• Imports: +2.6%

Q2 2025 (5.5% GDP): 

• Household spending: +5.3%
•  Government spending: +8.7%
• Capital formation: +1.2%
• Construction: +0.9%
• Exports and imports: +4.7%, +3.5%

Q3 2024 (5.2% GDP): 

• Household spending: +5.2% 
• Government spending: +5%
• Capital formation: +12.8%
• Construction: +9%
• Exports and imports: –1.3%, +6.5%

X. Government Spending Didn’t Collapse — It Held Up Amid Scandal; Public Construction Implosion 

Despite the corruption scandal, government consumption remained positive and was even higher in Q3 2025 than in Q3 2024. This alone undermines the narrative that the GDP slump was simply "sentiment shock."

Figure 3

Government construction plummeted 26.6%, matching the pandemic lockdown era of Q3 2020. This single line item pulled construction GDP into a mild –0.5% decline. (Figure 3, topmost pane) 

But buried beneath the headline, private construction was strong:

• Private corporate construction: +14.4%
• Household construction: +13.3%

These robust figures cushioned the damage from the government crash.

Absent private-sector strength, construction GDP would have mirrored the government collapse. 

Government construction also contracted –8.2% in Q2, reflecting procurement restrictions during the midterm election ban. 

As we already noted last September: (bold original) 

"Many large firms are structurally tied to public projects, and the economy’s current momentum leans heavily on credit-fueled activity rather than organic productivity."

"Curtailing infrastructure outlays, even temporarily, risks puncturing GDP optics and exposing the private sector’s underlying weakness." 

The Q3 data has now validated this. 

A large network of sectors tied to public works absorbed the first-round impact—and that ‘shock’ bled into already stressed consumers. 

XI. External Sector: Trump Tariffs’ Exports Front-Loaded, Imports Slowing 

Exports rose +7% in Q3 2025, boosted by front-loading ahead of Trump tariffs. 

Imports slowed to +2.6%, the weakest pace in recent periods, reflecting consumer retrenchment. 

This divergence highlights how external momentum was artificially timed, while domestic demand faltered.

XII. Corruption Is the Symptom; Policy Induced Malinvestment Is the Disease

The controversial flood control scandal represents the visible tip of a much deeper corruption iceberg. It is not the anomaly—it is the artifact. 

Political power is, at its core, about monopoly. 

In the Philippines, political dynasties are merely its institutional symptom. The deeper question is: what incentives drive politicians to cling to power, and how do they sustain it? 

Public service often serves as a facade for the real intent: access to political-economic rents, impunity, and the machinery of patronage. Through electoral engineering—name recall, direct and indirect (policy-based) vote-buying, and bureaucratic capture—politicians commodify entitlement, turning public goods into tradable favors.

Dependency is weaponized or transformed into political capital, politicizing people’s basic needs to secure loyalty, votes, and tenure. 

Poverty becomes leverage. 

This erodes the civic ethic of self-reliance and responsibility, and it traps constituents—who participate out of a survival calculus—into legitimizing dynastic monopolies. 

This free-lunch electoral process, built on deepening dependence on ever-growing public funds, represents the social-democratic architecture of a political economy of control, centralization, and extraction—one that incentivizes corruption not as an aberration but as a structural outcome of concentrated power. 

XIII. Increasing Influence of Public Spending in the Economy 

Direct public spending reached 16.1% of 9M 2025 real GDP—the second highest on record after the 2021 lockdown recession.  (Figure 3, middle diagram) 

This figure excludes government construction outlays and the spending of private firms reliant on state contracts and agency revenues, such as PPPs, suppliers, outsourcing, etc. 

In this context, corruption is not merely a moral failure but a symptom of structural defects in the political-economic electoral process, reinforced by the misdirection of resources and finances, which signifies chronic systemic malinvestment. 

GDP metrics mask political decay, economic erosion, and institutional fragility. 

Yet even with statistical concealment, the entropy is visible. 

XIV. Crowding Out, Malinvestment, and the Debt Time Bomb 

The ever-rising share of public spending has coincided with a slowdown in GDP growth. Public outlays now prop up output, while pandemic-level deficits have shrunk the consumer share of GDP. (Figure 3, lowest graph) 

Crowding-out effects, combined with “build-and-they-will-come” malinvestments, have drained savings and forced greater reliance on leverage—weakening real consumption.

Figure 4 

Most alarming, nominal public debt rose Php 1.56 trillion YoY in September, equivalent to 126% of the Php 1.237 trillion increase in nominal GDP over the same period. 126%! (Figure 4, topmost visual) 

As a result, 2025 public debt-to-GDP surged to 65.11%—the highest since 2006. (Figure 4, middle graph) 

Needless to say, Corruption is what we see; malinvestment is what drives the crisis path. 

XV. Statistical Mirage: Base Effects and the GDP Deflator 

Yet, the “shocking” Q3 GDP overstates its actual rate. 

Because the headline GDP growth rate is derived from statistical base effects, almost no analyst examines the underlying price base, which is the most critical determinant of real GDP. The focus is always on the percentage change—never on the structural level from which the change is computed. 

For years, the consensus has touted the goal of “upper middle income status,” equating progress with high GDP numbers. 

But whatever outcome they anticipate, the PSA’s nominal and real GDP price base trends have consistently defied expectations. (Figure 4, lowest chart) 

The primary trend line was violated during the pandemic recession and replaced by a weaker secondary trend line. Statistically, this guarantees that base-effect growth will be slower than what the original trajectory implied. 

The economy is no longer expanding along its pre-pandemic path; it is merely oscillating below it. 

XVI. Testing Support: Fragility in the Data, Institutional Silence 

Recent GDP prints have repeatedly tested support levels. The risk is not an upside breakout but a downside violation—the path consistent with a recession.   

Q3 GDP brought both the nominal and real price base to the brink of its crucial support. A further slowdown could trigger its incursion. 

Yet you hear none of this discussed—despite all this coming straight from government data. 

The silence underscores a broader indictment: statistics are deployed as optimism theater, not as diagnostic tools. 

XVII. Overstating GDP via Understating the CPI 

And this brings us to a deeper issue that amplifies the problem. 

Real GDP is computed by dividing nominal GDP by the implicit GDP deflator. For the personal consumption component, the PSA uses CPI-based price indices to adjust nominal household spending.

Figure 5

The implicit price index is technically the GDP deflator. (Figure 5, topmost diagram) 

If CPI becomes distorted by widespread price interventions—such as MSRPs, the Php 20-rice rollout, or palay price floors—its measured inflation rate can diverge from actual market conditions. 

Any downward bias in CPI would mechanically lower the corresponding deflators used in the national accounts. 

A lower deflator raises the computed real GDP. 

Thus, even without access to PSA’s internal methodology, the basic statistical relationship still holds: systematic price suppression in CPI-tracked goods would tend to understate the deflator and, in turn, overstate real GDP. 

As noted in our August post: (bold & italics original) 

"Repressing CPI to pad GDP isn’t stewardship—it’s pantomine. A calculated communication strategy designed to preserve public confidence through statistical theater.  

"Within this top-down, social-democratic Keynesian spending framework, the objective is unmistakable: Cheap access to household savings to bankroll political vanity projects. These are the hallmarks of free lunch politics.  

"The illusion of growth props up the illusion of competence. And both are running on borrowed time.  

XVIII. Real Estate as a Case Study: GDP vs. Corporate Reality 

The GDP headline may be overstating growth due to deviations in calculation assumptions or outright political agenda— what I call as "benchmark-ism." 

Consider the revenues of the Top 4 listed developers—SM Prime, Ayala Land, Megaworld, and Robinsons Land. 

Despite abundant bank credit flowing to both supply and demand sides, their aggregate revenues increased only 1.16% in Q3 2025, barely above Q2’s 1.1%. This mirrors the slowing consumer growth trend: since peaking in Q2 2021, revenue growth rates have been steadily declining, leading to the current stagnation. The slowdown also coincides with rising vacancies. Reported revenues may still be overstated, given that the industry faces slowing cash reserves alongside record debt levels. 

Meanwhile, official GDP prints show:

• Real estate nominal GDP: +6.8%
• Real estate real GDP: +4.7% 

Yet inflation-adjusted revenues for the Top 4 translate to zero growth—or contraction. 

Their revenues accounted for 26.4% of nominal real estate GDP in Q3 2025. Real estate’s share of national GDP was 6.2% nominal, 6% real. (Figure 5 middle image) 

This gap between corporate revenues and GDP aggregates suggests statistical inflation of output. 

This highlights a broader point: The industry’s CPI barely explains the wide divergence between revenues and GDP. And this is just one sector. 

Comparing listed company performance with GDP aggregates exposes the disconnect between macro statistics and micro realities, not just episodic shocks—a motif that recurs across retail, consumption, and sentiment indicators. 

Yet, natural calamities—especially typhoons—are often blamed, but their impact on national output is minimal—much like the weak revenue trends, the real slowdown lies deeper than headline statistics suggest. 

XIX. Calamities and GDP: Human Tragedy vs. Statistical Resilience

Despite public perception, the Philippine economy has been structurally resilient to typhoon disruptions—not because disasters are mild, but because GDP barely registers them. 

In Q3 2025, ten tropical cyclones passed through or enhanced the monsoon system, with the July cluster (Crising, Dante, Emong + Habagat) causing an estimated Php 21.3 billion in officially reported damages and the September cluster (Nando/Ragasa, Bualoi/Ompong + Habagat) adding another Php 1.9 billion in infrastructure and agricultural losses. 

The combined Php 23.1 billion destruction sounds enormous, but in macroeconomic terms it is equal to just 0.37% of quarterly nominal GDP. 

This pattern is consistent with past experience: Yolanda (Q4 2013, 5.4%), Odette (Q4 2021, 7.9%), Ompong (Q3 2018, 6.1%), Pablo (Q4 2012, 7.8%), and Glenda (Q3 2014, 5.9%) all inflicted large localized damage yet barely dented national output. (Figure 5, Table) 

The reason is structural: GDP is weighted toward services and urban economic activity, while disasters strike geographically narrow areas. Catastrophic in human terms, typhoons seldom materially affect national accounts. 

The Q3 2025 storms fit the same pattern: human tragedy, fiscal strain, and regional losses—but minimal macroeconomic imprint. Resilience in the data conceals suffering on the ground, because GDP measures transactions, not destroyed livelihoods. 

XX. Calamities as a Convenient Political Explanation and Bastiat’s Broken Window Fallacy 

Given this historical consistency, attributing the Q3 slowdown to typhoons is politically convenient but analytically weak. It reflects self-attribution bias—positive outcomes are claimed as accomplishments, negative ones pinned on exogenous forces. 

GDP simply does not respond to weather shocks of this scale. At most, calamities intensify pre-existing consumption weakness rather than create it. They add entropy to a deteriorating trend; they do not determine it. 

The same applies to earthquakes. The deadly July 1990 Luzon earthquake claimed over 1,600 lives and caused Php 10 billion in damage, yet Q3 1990 GDP posted +3.7% growth. The slowdown that followed led to a technical recession in Q2 (-1.1%) and Q3 1991 (-1.9%), driven more by political crisis (coup attempts, post-EDSA transition) and the US recession (July 1990–March 1991) than by the quake itself. 

Recovery spending from calamities gets factored into GDP, but as Frédéric Bastiat taught us, this is the broken window fallacy—a diversion of resources, not genuine growth. 

XXI. Expanding Marcos-nomics: State of Calamity as Fiscal Stimulus 

The administration has relied on this same narrative today. 

The cited calamities—Typhoon Tino and Uwan, plus the Cebu and Davao earthquakes—occurred in Q4 2025. These events contributed to entropic consumer conditions but did not create them. 

But their political and bureaucratic timing proved useful. 

Authorities tightened the national price freeze a day before the USD/PHP broke 59 (see reference discussion on the USDPHP breakout) 

Typhoon Tino, followed by Uwan, justified declaring a State of Nationwide Calamity for one year—the longest fixed-term declaration in Philippine history. (By comparison, the COVID-era State of Calamity lasted 2.5 years due to repeated extensions.) 

This one-year window: 

• Reinforces the price freeze, aggravating distortions.
• Enables liberalized public spending under relief and rehabilitation cover.
• Allows budget realignments, procurement exemptions (RA 9184 Sec. 53[b]), calamity/QRF access, and inter-agency mobilization (RA 10121). 

In effect, the national calamity declaration acts as a workaround to the spending constraints imposed by the flood-control corruption scandal. It restores fiscal maneuvering room under the guise of emergency relief and rehabilitation. 

This is emergency Marcos-nomics, designed to lift headline GDP via public-sector outlays—on top of pandemic-level deficits, easy-money liquidity, and the FX soft-peg regime. 

XXII. More Easing? The Rate-Cut Expectations Game 

Layered onto this is the growing consensus expectation of a jumbo BSP rate cut in November. One must ask: 

• Are establishment institutions applying indirect pressure on the BSP?
• Or is the BSP conditioning the public for an outsized cut to stem a crisis of confidence? 

Both interpretations are possible—and neither signals macro-stability. 

Meanwhile, supermarkets warn that “noche buena” food items may rise due to relief-driven demand—a symptom of distortions. 

This is the predictable byproduct of a price-freeze regime: shortages, hoarding, cost-pass-through, and black-market substitution.

XXIII. A Fiscal Shock in the Making, Black Swan Dynamics 

At worst, emergency stimulus during a slowdown widens the deficit and accelerates fiscal deterioration—pushing the economy toward the fiscal shock we warned about in June: 

"Unless authorities rein in spending—which would drag GDP, risking a recession—a fiscal shock could emerge as early as 2H 2025 or by 2026.  

"If so, expect magnified volatility across stocks, bonds, and the USDPHP exchange rate."

Figure 6 

Market behavior is already signaling intensifying stress: the USDPHP and the PSE remain under pressure despite repeated rescue efforts. (Figure 6) 

XXIV. Conclusion: Crisis as the Only Reform 

A political-economic crisis—a black swan event—doesn’t happen when expected. It occurs because almost everyone is in entrenched denial and complacency, blinded by past resilience. Like substance abuse, they believe unsustainable events can extend indefinitely: It hasn’t happened, so it won’t (appeal to ignorance). 

But history gives us a blueprint: 

economic strains → political tensions → revolution/reforms

• EDSA I followed the 1983 debt crisis.
• EDSA II followed the 1997 Asian Financial Crisis.

Economic strains were visible even before the flood-control scandal. This is Kindleberger’s and Minsky’s late-cycle phase: swindles/fraud/deflacation emerge when liquidity thins, growth slows, tenuous relationships and political coalitions fracture. 

More improprieties—public and private—will surface as slowing growth exposes hidden malfeasance, nonfeasance, and misfeasance. 

The sunk-cost architecture of vested interests, built on free-lunch trickle-down policies, points to a grand finale: either EDSA 3.0 or a putsch. 

A crisis, not politics, will force change. 

To repeat our conclusion last October, 

In the end, because both political and economic structures are ideological and self-reinforcing, reform from within is improbable.  

The deepening economic and financial imbalances will not resolve through policy, but will ventilate through a crisis—again the lessons of the post-1983 debt restructuring of EDSA I and the post-Asian Financial Crisis of EDSA II.  

____

References

Prudent Investor Newsletter, When Free Lunch Politics Meets Fiscal Reality: Lessons from the DPWH Flood Control Scandal, Substack, September 07, 2025 

Prudent Investor Newsletter, The 5.5% Q2 GDP Mirage: How Debt-Fueled Deficit Spending Masks a Slowing Economy, Substack, August 10, 2025 

Prudent Investor Newsletter, Is the Philippines on the Brink of a 2025 Fiscal Shock? Substack, June 08, 2025

Prudent Investor Newsletter, The Political Economy of Corruption: How Social Democracy Became the Engine of Decay, Substack, October 26, 2025 

Prudent Investor Newsletter, The USD-PHP Breaks 59: BSP’s Soft Peg Unravels, Exposing Economic Fragility, Substack, November 02, 2025

  

The USD-Philippine Peso Surges to 18-Month High: BSP Blames 'Speculators' as GIR Composition Exhibits Intervention Limits

 

Bretton Woods II served up a deflationary impulse (globalization, open trade, just-in-time supply chains, and only one supply chain [Foxconn], not many), and Bretton Woods III will serve up an inflationary impulse (de-globalization, autarky, just-in-case hoarding of commodities and duplication of supply chains, and more military spending to be able to protect whatever seaborne trade is left— Zoltan Pozsar

The USD-Philippine Peso Surges to 18-Month High: BSP Blames 'Speculators' as GIR Composition Exhibits Intervention Limits

In this issue

I. The Strong US Dollar and the Weak Philippine Peso

II. As USD/Philippine Peso Surged to 18-Month High, BSP Warns Against "Speculation"

III. The BSP’s Shift to a “Dovish" Stance; The USDPHP’s Lindy Effect

IV. Why the BSP’s Dovish Shift: Weakening GDP and Surging Interest Payments on Public Debt

V. USDPHP’s Bull Market Based on Inflationary Financing of Deficit Spending

VI. Soaring External Debt Means Surging USD "Shorts"

VII. The Philippine Peso to Benefit from a USD "Collapse?" BSP’s Assets Reveals a Different Story

VIII. The Composition of the BSP’s Gross International Reserves Exposes the Limits of the BSP’s Potential Interventions

IX. Will a Weak Peso Boost Exports While Hampering Imports?

X. The BSP Points to "Market Failure" by Shifting the Blame on "Speculators"

XI. USD Philippine Peso Signals Higher Inflation Risks, The Probable Shift to a Multipolar Currency System

The USD-Philippine Peso Surges to 18-Month High: BSP Blames 'Speculators' as GIR Composition Exhibits Intervention Limits 

As the USD Philippine peso soared to an 18-month high, the BSP points blamed "speculators" for the surge. However, this finger-pointing constitutes a smoke-screen.

I. The Strong US Dollar and the Weak Philippine Peso

Figure 1 

The US dollar index ($DXY) rose by 0.26% this week. The USD increased against most Asian currencies, with the exception of the Indian rupee ($INR), which fell by 0.29%. The INR benefited from inflows into its manic stock markets, a record $25 billion central bank payout to the government, and an all-time high in international reserves (as of May 17). (Figure 1, top and middle windows)

For the week, the USD surged the most against the Thai baht ($THB) by 1.6%, the South Korean won ($KRW) by 1.05%, and the Philippine peso ($PHP) by 0.99%.

Despite a massive $58 billion support and repeated threats to intervene by the Bank of Japan (BoJ), the Japanese yen fell by 0.9% week-on-week (WoW), with $USDJPY approaching 157, just slightly below 158, which represented a 34-year high reached at the end of April 2024.

Year to date, down by 5%, the PHP signified the region’s fifth weakest currency after the JPY (11.3%), THB (7.2%), KRW (6.1%), and the Vietnamese dong ($VND, 5.7%). 

II. As USD/Philippine Peso Surged to 18-Month High, BSP Warns Against "Speculation "

 The USDPHP reached Php 58.27, an 18-month high, on May 21st. 

Echoing the BoJ, the Philippine BSP chief implicitly chided speculators: The dollar continued to strengthen as the Federal Reserve signaled delay in cutting interest rates. The BSP continues to monitor the foreign exchange market but allows the market to function without aiming to protect a certain exchange rate. Nonetheless, the BSP will participate in the market when necessary to smoothen excessive volatility and restore order during periods of stress. (Businessworld, 2024)

In contrast to the BSP declaration, out of the 28 USD crosses, 13 were positive, and the USDPHP outperformed that day, according to Exante Data.

Further, while the BSP’s "plausible deniability" did not mention interventions, two days later, newswires reported that the monetary authority did support the peso: Mr. Remolona said that the central bank intervened by small amounts on Tuesday, when the peso sank to the P58 level for the first time in over 18 months or since Nov. 10, 2022. (Businessworld, 2024)

Even more, news also indicated that even before last week’s USDPHP’s November 22 high, the BSP had already been carrying out operations in support of the peso as early as May 7.

The BSP has been warning speculators since last April, or in June 2022, when the USDPHP was at 54.8!

Media suggests that the BSP’s shift from "hawkish" to "dovish" sentiment could have been the factor, yet the BSP remains adamant: Bangko Sentral ng Pilipinas Governor Eli Remolona Jr. remains unfazed by the hawkish signals from the US Federal Reserve, saying the BSP’s monetary policy decisions will be guided primarily by the Philippines’ own economic data rather than the Fed’s moves. (Inquirer, 2024)

III. The BSP’s Shift to a “Dovish" Stance; The USDPHP’s Lindy Effect

The BSP’s predilection in easing policy rates regardless of the US Federal Reserve’s stance is an exposition—it suggests that the Fed was a convenient pretext to justify the current monetary stance of local authorities. The BSP would readily abandon it when politics so determined.

To boost the economy, the BSP chief proposes to cut rates by 50 bps in the second half of 2024, possibly starting this August.

Nonetheless, typical of central banks, markets supposedly function as the culprits for any economic maladjustments—and not policymakers. They assume the role of Gandalf the Grey/White (in the Lord of the Rings series), setting boundaries against the adversary. 

In the Fellowship of the Ring, Gandalf commanded the demon Balrog against crossing the Bridge of Khazad-dûm, 'You shall not pass!' At least, Gandalf emerged victorious in his battle against the Balrog. 

On the other hand, the USDPHP could be considered a trend with Lindy characteristics. The Lindy effect is the "idea that the older something is, the longer it's likely to be around in the future" (Waschenfelder, 2021). In a word: time-bounded resilience. (Figure 1, lower image) 

Since gaining independence from the US, the Philippine peso has been pegged to the USD at Php 2. However, the defunct Central Bank of the Philippines (CBP) experimented with currency decontrols and reestablishment of controls until its dissolution and the establishment of the Bangko Sentral ng Pilipinas (BSP) in July 1993, which then adopted a managed float system (Wikipedia). 

In any case, from the CBP to the BSP, the USDPHP has remained on a 54-year uptrend, with periodic countercyclical movements. 

It's also no coincidence that the emergence of the USDPHP bull market has coincided with 'the Nixon Shock' in August 1971, which marked the end of the Bretton Woods system (dollar fixed to gold but gold was allowed only for international exchange—WGC) or the transition to the incumbent US dollar standard, the primary currency reserve for the global economy (CFR, 2023).

The thing is, the drivers of the USDPHP bull market from the past remain principal factors today, or even worse—meaning they should reinforce its bull market. 

IV. Why the BSP’s Dovish Shift: Weakening GDP and Surging Interest Payments on Public Debt 

Why would the BSP insist on cutting rates ahead of the Fed? 

First and foremost, the BSP may be aware that the GDP represents a mirage—it is weaker than advertised. This notion has been supported by the Q1 2024 financial performance of the PSEi 30. 

Naturally, with firms heavily reliant on credit, higher rates pose risks to both the GDP and the banking system. 

Secondly, and more importantly, public debt repayments and refinancing have been skyrocketing. 

Figure 2

Four-month public debt servicing soared by 49% to a historic Php 1.15 trillion, bolstered by interest payments (38.4%) and amortizations (52.4%). Though 82% of it accounted for local currency-denominated liabilities, it was lower than last year’s 84.9%, which means foreign obligations filled the rest. (Figure 2, topmost graph)

The four-month carrying cost of published public debt was just 28.3% off the annual or last year’s all-time high! "Higher for longer" translates to even more debt repayments and refinancing on the back of higher repricing. (Figure 2, second to the highest graph)

Though the mainstream rejoiced at April’s fiscal surplus, brought about by the record revenues of Php 537 billion as a result of the annual tax filing, non-tax revenues, which comprised 41.6% of the total, delivered the substance. 

Non-tax revenues more than doubled (114%) while BIR revenues grew 12.7%. For most years, surpluses signified a seasonal feature of April—again in response to the annual tax filing.

And yet, public spending surged 32.3% to Php 494.5 billion.

In a nutshell, due to non-tax revenues—partly from dividends of Government-Owned and Controlled Corporations and "one-off remittance of disposition proceeds from the Bases Conversion Development Authority (BCDA)"—deficit spending was moderated.

Ironically, despite this, the cumulative four-month fiscal deficit swelled by 12.7% year-over-year—the third-largest—as the Bureau of Treasury drew from its cash reserves (-20.4%) and reduced its borrowing (-23%). The drain of liquidity likely means a tsunami of borrowings going into the year-end. (Figure 2, second to the lowest chart)

Figure 3

And yet, the USDPHP has tracked the uptrend in public spending, and subsequently, the fiscal deficit. (Figure 2, lowest chart and Figure 3, topmost graph)

V. USDPHP’s Bull Market Based on Inflationary Financing of Deficit Spending

Naturally, deficit spending requires financing. How? 

Aside from taxes, the government draws from the public’s savings. Therefore, the uptrend in USDPHP also reflects the "unstoppable" bull market in public debt. (Figure 3, second to the highest image)

Due to the insufficiency of public savings, financial authorities have resorted to the "monetization " of public liabilities.  

The acceleration of the USDPHP also echoes the rise of the BSP’s net claims on the central government (NCoCG). (Figure 3, second to the lowest graph) 

For possible public relations (PR) goals, monetary authorities limit the expansion of their balance sheets. Instead, they rely on the banking and financial system to implement their objectives. 

Consequently, the USDPHP likewise manifests the inflationary credit expansion of the banking system through the monetization of public liabilities. All-time highs in bank holdings of NCoCG should eventually impact the USDPHP. (Figure 3, lowest window) 

Additionally, record bank holdings of NCoCG have also aligned with their historic Held-to-Maturity (HTM) assets, which escalates the siphoning off of liquidity in the system.

VI. Soaring External Debt Means Surging USD "Shorts " 

Hold it, because there’s more.

The government has borrowed not only to fulfill the FX requirements of the economy but also to meet the BSP’s balance sheet target.

Figure 4

Though financial authorities have relied on domestic borrowings to bridge their financial chasm, external borrowings have also been accelerating. In Q4 2023, it grew by 12.4% to a record USD 125.4 billion. (Figure 4, topmost chart) 

Historic fiscal deficits have reflected the surge in external debt. (Figure 4, second to the highest graph) 

The public sector, with a 58% share as of December 2023, has accounted for a vast majority of the total. (Figure 4, lowest window) 

Since external borrowing has grown faster than the published Gross International Reserves (GIR), the debt stock has now surpassed the purported reserves. That being said, do these appear to be 'ample reserves' to defend the peso? (Figure 4, second to the lowest image) 

Furthermore, the intensified increases in external debt have also contributed to USD "shorts."

Figure 5

While the government can inflate away its domestic debt, paid for by the loss of purchasing power of the citizenry, this would magnify the real value of FX debt—or require more pesos to finance FX operations. (Figure 5, topmost visual) 

So why shouldn’t the USDPHP be higher?

VII. The Philippine Peso to Benefit from a USD "Collapse?" BSP’s Assets Reveals a Different Story

The grapevine suggests that the Philippine peso could benefit from weakness or even a "collapse" in the US dollar.  

However, the facts tell a different story.

Presently, the world operates under a de facto US dollar standard, where US dollar reserves serve as an anchor for domestic currency and monetary operations. 

As a share of its balance sheet, the BSP have built its international reserve holdings from 31% in 1993 to 85% in 2010.  (Figure 5, second to the highest pane) 

The BSP have maintained its FX holdings in a tight range of 85% to 87% until 2019.  The BSP's local monetary operations have been closely tied to these reserves. This reliance has led to a rising share of currency issuance compared to liabilities. (Figure 5, second to the lowest graph) 

The buildup of FX reserves fueled a 9-year countercyclical rebound (2004-2012) in the Philippine peso. It hallmarked the "salad days" for the Philippine peso. 

This period also witnessed a reduction in the share of currency issuance, representing an implicit cleanup of both government and private sector balance sheets. 

However, this changed following the Great Recession in 2007-2008, when the BSP, like its global peers, lowered rates to stimulate credit expansion and mitigate economic weaknesses. This marked the beginning of the era of easy money.

Fast forward to the present, a massive injection into the financial system amounting to Php 2.2 trillion, or about 11% of the GDP, signaled an emergency monetary response to the pandemic crisis. 

This significantly inflationary operation resulted in a substantial decline in FX reserves, indicating that the government has been printing more money than its FX anchor permits. 

Given these factors, why shouldn't the USDPHP rise? 

VIII. The Composition of the BSP’s Gross International Reserves Exposes the Limits of the BSP’s Potential Interventions

Through a gradual buildup of net foreign assets, the BSP has been attempting to restore its previous range of FX reserves. However, the growth rates of BSP's GIR and banks' FX assets have been slowing significantly. In contrast, the BSP's net foreign assets continue to expand.

Figure 6

The BSP has been relying less on its FX holdings for its GIR operations, as evidenced by the declining trend. (Figure 6, topmost graph)

Since 2018, the BSP has modernized, utilizing Other Reserve Assets (ORA) such as swaps, repos, and other short-term loans to boost its reserves. From a peak of 12.5% in January 2023, ORA accounted for 5.3% of the GIR as of March. (Figure 6, second to the highest window)

Interestingly, despite record gold prices, the BSP has been selling off its gold reserves, leading to a decrease in physical metal holdings. (Figure 6, second to the lowest chart)

However, thanks to record USD gold prices, this has bolstered the headline value of the GIR.

In short, the headline GIR conceals its actual state through the use of 'borrowed reserves.' 

Even with borrowed reserves, the rising USDPHP has stalled GIR growth. (Figure 6, lowest image)

Figure 7 

In other words, through the expansion of borrowed reserves in the composition of the GIR, BSP operations ultimately depend on loose financial conditions abroad. 

Nevertheless, a tightening of access to local and foreign FX flows will limit the BSP’s capacity to intervene, as evidenced by the growth strains in the GIR relative to the USDPHP. (Figure 7, topmost graph) 

So why shouldn’t the USDPHP rise?

Furthermore, signaling a divergence between a 'genuinely hawkish' Fed and a 'dovish' BSP could lead to a wider yield spread favoring US Treasuries over domestic counterparts, similar to Q4 2020 through Q2 2021, when the USDPHP rose fastest. (Figure 7, second to the highest graph) 

So why shouldn’t the USDPHP rise? 

Here's the thing: The BSP has benefited from the rise of the USD, which has led to revaluation gains from its USD asset holdings. This is evident in its increased reliance on 'investments' while reducing its gold and FX holdings. 

Unfortunately, we don’t have data on the distribution share of the GIR or the BSP’s FX portfolio.

However, with the BSP’s FX reserves accounting for over 70% of its assets, how would a USD "collapse" favor the PHP?

To elaborate, with the BSP’s net worth and capital accounting for only 1.9% and 0.8% of its December 2023 assets, wouldn’t a substantial markdown in its USD portfolio render the BSP insolvent? So, what would the BSP do, print more?

As noted in 2021, (bold original) 

The BSP must amass sufficient FX reserves to match domestic monetary operations required to maintain the de facto US currency reserve standard. Otherwise, with inadequate FX anchor, the peso must fall.  (Prudent Investor, 2021) 

In both cases, why shouldn’t the USDPHP rise? 

All this is owed to the Keynesian policies of 'build and they will come,' predicated on 'spending drives the economy,' which has led to a record shortfall in savings and increased reliance on debt (local and foreign) to fill the funding gap. 

How is this supposed to represent "sound" macroeconomics? 

Why shouldn’t the USDPHP rise? 

IX. Will a Weak Peso Boost Exports While Hampering Imports? 

We are further told by the echo chamber that there is a bright side to the weak peso. 

Or they have been quick to rationalize: a weaker peso would boost export competitiveness and hinder imports. 

Really? 

Data from the Philippine Statistics Authority says otherwise. 

Firstly, from 2013 to the end of 2023, imports have risen alongside the increase in the USDPHP. (Figure 7, second to the lowest image)

Why? Simply put, due to the inadequacy of local production and the political preference to prioritize household consumption—evidenced by the record savings-investment gap. Additionally, interventionist and inflationary policies reduce competitiveness. 

Under such conditions, the bull market in the USDPHP has not hindered import growth. Weak imports in the face of a rising USDPHP have only begun to surface in 2024.

Moreover, while the overall trend in goods exports mirrors the rise of the USDPHP, increasing USDPHP have not necessarily translated to a surge in exports. (Figure 7, lowest chart)

Using reductio ad absurdum, if weak currencies were to deliver an export utopia, why not accelerate the devaluation? Better yet, why not embrace hyperinflation or the utter destruction of the Philippine peso?

The reality is that none of the countries that experienced the worst episodes of hyperinflation—such as Hungary, Yugoslavia, Zimbabwe, Republika Srpska, and others—became export giants during the devastation of their respective currencies. 

The essence is that heuristics do not equate to economics.

Certainly, the weak peso, primarily a result of domestic policies, will have redistribution effects on the economy, and some sectors or enterprises may benefit from it. However, the overall impact is a decline in the standard of living for the general public. 

Why is the USDPHP destined to reach new highs?

Briefly, it's due to the accumulation of economic maladjustments resulting from internal policies.

Figure 8 

X. The BSP Points to "Market Failure" by Shifting the Blame on "Speculators" 

The markets or the so-called 'speculators' understand this. Unprecedented leveraging raises manifold risks, including interest, currency, and credit risks. (Figure 8, topmost image)

As previously explained, intensified immersion in domestic debt does not serve as a talisman against the 'demon' represented by a crisis. The ventilation of economic imbalances eventually forces them to surface.

Speculators serve as easy scapegoats for a politicized agency meant to protect redistribution policies favoring the government and the elites. Authorities shift the onus onto the source of the imbalances by pointing to the supposed role of "market failure."

Still, why does the BSP not see the rocketing growth in FX deposits? Are they not speculators too? (Figure 8, middle chart) 

Since the penetration levels of the banking system remain far from the levels desired by the establishment, could this buildup in FX deposits primarily be about the elites? Will the BSP crack down on them? 

XI. USD Philippine Peso Signals Higher Inflation Risks, The Probable Shift to a Multipolar Currency System 

Unlike in 2018, when falling CPI coincided with a rally in the peso, the BSP’s ONRRP elevated rate has recently paralleled the rise of the USDPHP. (Figure 8, lowest graph)

If anything, the USDPHP tells us that the inflation genie remains lurking around the corner, yet to wave its magical wand—a third, "bigger" wave of the CPI. 

For the USDPHP, whether 'hawkish' or 'dovish' doesn't matter. 

Rather, the BSP’s inclination towards rate cuts is a response to the softening internals of the GDP and the increasing cost of carrying public and private debt, along with other forms of leverage. 

Finally, while we believe that the USD standard is in its twilight phase, this climax doesn’t necessarily translate to an imminent 'collapse' in the USD.

As illustrated by the BSP’s balance sheet, FX assets (mostly in USDs) comprise the majority.

The USD standard entails that central banks hold assets mostly in USDs.

The transition to a "war economy" implies increased socialization through deficit 'wartime' spending—signifying a global shift towards more inflationary policies in support of war and other war-related agendas. 

This also suggests a diminishing contribution from the private sector. 

That said, as the world realigns along hegemonic lines, nearly every nation would likely follow the US in embracing fiscal dominance—in which inflation becomes a feature, not a bug. 

Moreover, the expanding influence of the "war economy" signifies a transition to a "multipolar" world. 

This transition implies involvement in more aspects—social, economic, monetary, financial, technological, informational, environmental, and tourism-related—leading to increased global economic, financial, and social fragmentation, supply chain dislocations, the formation of economic or trading blocs, and more. 

All of these factors extrapolate to reduced economic efficiencies and higher risks. 

The culmination of the USD standard might also signal a transition towards a "multipolar" monetary system, where the architecture of the currency system of the emerging competitor(s) could be anchored on a basket of commodities. 

While the sequence of realignment of alliances has begun, other developments have yet to materialize. 

As the renowned Credit Suisse analyst Zoltan Pozsar has propounded,

We are witnessing the birth of Bretton Woods III – a new world (monetary) order centered around commodity-based currencies in the East that will likely weaken the Eurodollar system and also contribute to inflationary forces in the West. A crisis is unfolding. A crisis of commodities. Commodities are collateral, and collateral is money, and this crisis is about the rising allure of outside money over inside money. Bretton Woods II was built on inside money, and its foundations crumbled a week ago when the G7 seized Russia’s FX reserves… (Pozsar, 2022) 

____

References

Businessworld, BSP seeks to curb forex speculation, May 24,2024 

Businessworld, Peso hits 58:$1 as Fed stays hawkish, May 21, 2024 

Inquirer.net, BSP chief unfazed by U.S. Fed’s hawkish signals, May 23, 204

Thomas Waschenfelder, The Lindy Effect: Finding Signal In Noise, Wealest.com

Wikipedia, Philippine Peso

World Gold Council, The Bretton Woods System

Anshu Siripurapu and Noah Berman, The Dollar: The World’s Reserve Currency, July 19,2023 CFR.org,

Prudent Investor Newsletter, External Debt Growth Accelerates in Q3! Why This Uptrend Will Continue, December 19, 2021

Zoltan Pozsar, Bretton Woods III, Credit Suisse Economics, bullionstar.com March 7, 2022